Productions & Operations Management at Grandiose Motors - Case Study Example

Analytical Report: Productions & Operations Management at Grandiose Motors EXECUTIVE SUMMARY This was commissioned based on a case study to assess some of the major problems being experienced by Grandiose Motors with regards to execution of their expansion plans. The main problems identified were that there were no proper policies in place with regards to procurement and inventory management policies. Additionally, it was revealed that since the organization purchased different types of service parts and materials it could not adopt the same procurement and inventory procedures for the different types of parts and materials. A recommendation for procurement management policies is that the procurement department needs to be structured. The structure is to include giving the department a fresh outlook and have clear procurement objectives, offer training to procurement personnel including incentives for top performers, engage and offer services to other functional areas within the organization and finally integrate and forge ahead together with the other functional areas of the organization. As for the inventory issue it is recommended that products be obtained from the vendors on credit terms and the vendors be paid only after the products have been sold within 90 days subsequent to the date of sale. Finally, on the issue of different procurement procedures with respect to different material parts, the recommendation is that the 80/20 technique be adopted. The Purchasing Manager Grandiose Motors 11th May, 2010 Felix Fabulous, CEO Grandiose Motors, Dear Sir Acting on your request, the Purchasing Manager at Grandiose Motors has prepared a report assessing some of the major issues that are affecting the successful execution of the organization’s expansion plans. The intention of this report is to reveal the findings of the research carried out with respect to these issues and offer recommendations for the appropriate steps of action to be taken to circumvent the same. INTRODUCTION It is common knowledge that all business organizations are formed with an aim of making profit. As a means to achieve this end, a number of factors have to be properly put in place; otherwise chances of failure will be high. Businesses that have successfully achieved the profit making objective, more often than not aim at expansion through diversification or otherwise (Aidis & Welter, 2008). For a business to successfully expand its operations it has to come up with clear well laid out strategies. Grandiose Motors is one such organization that has achieved the profit making objective and expanded though on a small scale. Grandiose Motors should be upbeat on the level of success achieved so far with respect to how successful the three branches of the firm have been. Additionally, things should be looking up for the business in all aspects of growth considering that a new outlet that deals with a diversified range of products has been opened, Unfortunately, this has not been the case. Background Expansion of the business is proving to be a hard feat to achieve than initially anticipated, which should not be the case. Factors like finance, space for business growth and so on are weighing in heavily on the business expansion plans. It is therefore imperative to critically look at these factors as it is virtually impossible for any business to operate without the two. Major emphasis should be placed on the first one, that is, the financial aspect since it is a pillar when it comes to business operations. Incidentally, it is important to address other key business functions, the most outstanding one being business operations. Challenges that are cropping up as a result of business expansion are mainly brought about by inadequate strategies or lack of some strategies to deal with same (Drucker, 2007). Proper strategies with regards to business expansion can only be reached at and executed through proper business operations and effective management of these operations (Murthy, 2007, p.2-4). Aim The aim of this report is to ascertain these strategies that are lacking or inadequate, critically evaluate these strategies and forge ways within which they can be best addressed. As the purchasing manager to this organization, it is my mandate to look for ways and recommend these ways to you, some of these ways include how the organization will structure procurement and inventory functions, the adoption of different policies with regards to the diverse parts that the organization procures and so on. Scope This report will look at how the inventory and procurement functions are to be structured and the steps to be taken prior to the actual structuring in line with the viewpoint that business operations management brings about efficiency and effectiveness (Bettley et al, 2005). The report also covers research on appropriate policies with regards to procurement and inventory management, and the different procurement and inventory policies to be implemented with respect to different service and material parts. FACTORS TO CONSIDER PRIOR TO PROCUREMENT Before structuring the procurement and inventory functions it is important to have a brief overview of some of the things that should be put into consideration to ensure that the procurement process is effective. Some of these ways include: Determining Requirements How procurement requirements of the organization will be determined so that the organization does not tie capital in products that are turned over at a slow rate, what actually this means is that parts procured should be those which have a high rate of turnover and are forecasted to be disposed in the present future so as to carter for current operating expenses (Marsh, 2000; Kurtz, 2008). Prior to procurement, it is essential that the organization determine the quantity of products that they need and at what costs. Quality Quality is also vital and should also be a key factor (Marsh, 2000). Since the main objective of the organization is to make profits, determination of the right quality and quantity to procure would go a long way in improving cost cutting measures, and in reducing wastes. The organization will always procure what is needed meaning no surplus and quality will ensure customer satisfaction and thus attract more revenue. Vendors The vendors or suppliers of the products that the organization procures are also an important factor that should be looked at. This is mainly because the organization requires a vendor who will meet its procurement needs at an affordable cost. It is daunting for the organization if it is faced by several vendors to procure from as getting the best value is an issue here. What is referred to as the best value is mainly based on costs, the services offered and whether quality is consistent or not. This not only ensures that the organization’s clients receive excellent services as a ripple effect of the quality services they get but it also ensures reliability in terms of quality. It is worth noting that quality and reliability are fundamental factors in any business organization and Grandiose Motors is not an exception. The vendors selected should also be more than one more so if lack of a particular product could lead to considerable losses. Relying on one vendor is risky as factors such as strike by the vendor’s workers and scarcity in raw materials could affect the flow supply ultimately leading to loss of customers and giving competitors the upper hand. Negotiation and Communication The organization should also ascertain ways in which these procurements are to be negotiated so as to obtain the parts at affordable prices. Communication of decisions reached at with regards to procurement is also as important as it is necessary. Communication should also be made both to the vendor and the relevant members of staff within the organization. Finally, an assessment procedure will be put in place to follow up if the procurement decisions reached at were effective (Bizmove.com n.d.) It is extremely important to set out procurement objectives for a business organization, by so doing; it will ensure that the organization does not lose focus with respect to procurement and this will ultimately enable it to reach well informed decisions when it comes to procurement. (Buddin n.d., pp.1-5) PROCUREMENT MANAGEMENT POLICIES According to Harding and Harding (2001), it is essential for an organization to have two types of procurement strategies: internal and external procurement strategies. Prior to taking these two strategies into account, it is important to fully understand the environment in which this organization presently operates. Any individual or group of persons that is charged with the responsibility of procurement has to identify and deal with the current and existing structures within the management. Some of the issues that need to be looked at carefully include: Management Attitude This implies the management attitude with respect to procurement, under what category or class the management places procurement, whether it is an overhead cost, a profit contributor, or it simply lies in between, who within the organization is charged with the responsibility of procurement, and whether procurement lies in the same level as other functions within the organization (functions such as sales, production, accounting, engineering, and so on). Research carried out reveals that the significance of the issues pointed out above is that they provide a clear framework on how things are run within the procurement department. This includes the level of importance given to this department. This not only facilitates smooth flow of procurement procedures but also portrays a positive picture to stakeholders such as creditors, shareholders and financial institutions that might offer financial assistance to the organization. Unless and until procurement is viewed by the organization to be a vital part to the organization and treated as such, plans, strategies and advice that have been put in place to assist in the same will be useless (Kurtz, 2008). Changes to be adopted Procurement must change the way other people look at it and there is no other way to do this than starting from within. Credibility is a process that grows with time. The department charged with procurement can start off by implementing the following changes: Proper and adequate training should be offered to all staff under the procurement section. This should be based on the fact that training is an element and thus it should be done on a continuous basis. Clear objectives should be put in place for the procurement department. These objectives should comprehensively address critical issues such as reduction in costs and lead time, better product quality, and so on. The organization should strive at achieving these goals at all costs. The outcome should be reported and recorded. The Procurement Department The procurement department should aim at providing and engaging the services of other functional areas within the organization, for instance: Engineering department: For locating fresh technologies, providing samples and so on. The world is steadily and rapidly becoming a global village, it is imperative therefore that the procurement department of Grandiose Motors engage the engineering department in tracing fresh technologies so as to remain relevant and updated. Accounting and finance department: To chart out better methods of payment and assist in solving issues related to discrepant invoices and other related issues. It is difficult for suppliers to operate without pay or with late payment, which is why it is important for the procurement department at Grandiose Motors to engage the services of finance and accounting department to swiftly solve such issues. Maintenance department: To deal with issues on whether spare parts are available. The significance of the procurement department engaging the services of this department is to avoid instances of shortages and such like situations. Thus timely delivery/procurement of products must be among the top priorities as it might direct and indirect losses such as customer losses and so on. Inventory department: This is for the purposes of reducing the levels of inventory, and ensuring proper mix, vendors can assist in achieving this end. Managing procured items effectively is an extremely challenging affair and this is the main reason why services of the inventory department should be sought after. Sales and marketing department: Procurement has access to most marketing staff, which can be an important source of information with regards to marketing. This is because procurement is always aware of fresh products before they hit the market. Develop a group of supporters within the organization on a continuous basis: Every achievement which contributes to profit that is attained by the procurement department should be broadcasted. This includes penetration into fresh markets, quick response to customer requirements, and better product quality. Full recognition including incentives should be given to all the staff members who play any role that assists the procurement department in attaining its objectives. The procurement department should play as a team together with other functional areas of business operations. To achieve this end, effective strategies should be implemented. The procurement department must fully identify with and be fully integrated with objectives of the top management. Forecasts with regards to sales and annual planning meetings alone are not adequate to give solutions that encompass long term focus and corporate goals that the procurement department needs to come up with effective strategies (Palmatier & Crum, 2003). To come up with significant strategies, the procurement department ought to be fully aware of future markets and products, the organization’s vision and plans with regards to growth. Further, the department should clearly identify present and prospective competitors, fresh technologies that conform to future products and the management economic sentiments. Equipped with these facts, the procurement team can plan for the necessary resources needed to assist the organization’s long term goals. It is therefore very important that procurement functions be structured in tandem with the points outlaid above if any level of success is to be realized. INVENTORY MANAGEMENT POLICY Inventory management is also a critical factor that the organization can only overlook at its own peril. Wallin et al (2006) point out that procured goods inventory and management of the same should be a top priority for those organizations that desire to have an edge over their competitors and survive in the market. A brief example is that of a manufacturing company that typically spends 56 cents on average out of every dollar of revenue to take care of direct expenses of the procured goods. Wholesalers bear even higher costs with respect to procurement. Additional to the direct expenses figure there is indirect costs related to inventory management of the procured products which is estimated to fall between 30 to 35 percent of the procured goods’ value (Müller, 2003). The After Effect Thus if critically looked at, the total cost of procured goods inventory is relatively high. This therefore implies that at any given time, an organization that holds 20 million dollars in procured goods inventory would in the same respect incur an extra 6-7 million dollars due to stock holding costs and material handling, that is, indirect and direct costs that if trimmed down can have a positive considerable impact on a firm’s revenue (Müller, 2003). Thus, it is worthy noting, Sir, that most business organizations, be they manufacturing, wholesale or retail, are outdoing each other in the search for better methods and techniques with regards to inventory management so as to trim down direct investments in procured goods inventory and the indirect expenses borne to manage these inventories. Inventory Management: Factors to Take into Account A proper stock management technique for any procured good should cover the amount of capital tied in physical goods and expenses that relate to planning, storing, and handling that particular good or item (Brigham & Houston, 2007). Consider a relevant brief example of an organization that is in the same trade as Grandiose Motors, that is, AutoZone inc., an automobile parts retailer with more than 3000 outlets nationally. It is comsistently chasing pay-on scan contracts with its vendors where repair and maintenance parts on the counters of AutoZone shops are in essence owned by AutoZone’s respective vendors (Wallin et al, 2006, p.51). It is only after the item has been scanned and disposed that the vendor is then paid by AutoZone. The payment terms stipulate that payment is made within 90 days following the date of sale. Such policies are the ones that the organization should seriously consider to adopt as this means that the organization will only pay for what it has actually disposed. Incidentally, the 90-day rule works in favour of the organization as cash earned from sale of an item can in return be used by the business as a soft loan and be utilized either to procure more items or even to take care of expenses that are incurred due to business operations. The organization can capitalize on the 90-day credit period to use the cash obtained to earn more cash from the same. This can take the form of investment through financial institutions for instance purchasing shares or depositing the money in a fixed deposit account for it to earn interest which would go a long way in assisting the organization to sort out its financial issues as it is experiencing financial constraints (Wallin et al, 2006, p.51) The 80/20 Rule Since Grandiose Motors deals in a wide assortment of products with respect to the vehicles they procure and the different parts that the organization purchases, the organization’s procurement policies should be differential and intricately selected. An appropriate procurement analysis that best suits Grandiose Motors is the 80/20 rule or the ABC approach (Parmenter, 2007). The 80/20 technique is based on a school of thought that says that 80 percent of a firm’s inventory cost is as a result of only 20 percent of those items (Tyson & Schell, 2008). This technique is best depicted by the pareto curve, a curve applied by many business organizations to split stock items into three categories, that is, A, B, and C. Category A refers to those items or goods that account for 80 percent of the total inventory costs, category B refers to those items that account for 13 percent of total inventory costs and finally, the C category refers to those items that account for 7 percent of total inventory costs. A classification of inventory items such as this, once implemented at Grandiose, would facilitate a proper stock control rule for the various categories of stock products that the organization procures. This would ultimately mean that a consistent and fully comprehensive inventory control procedure should be adopted for items that fall under category A, a procedure that is less tedious than that of category A items to be adopted for those items in category B, and a procedure that is simple in nature would be appropriate for those items in category C (Ho, 1999, p.14; Saxena, 2009, p.106; Muller 2003, p188: Pradhan, 2006, p. 281). CONCLUSION Dear Sir, it is worth noting that procurement and inventory management play an extremely vital role in a business entity, thus they should take top priority in management decisions at Grandiose Motors. Most business owners overlook this fact and it eventually leads to the downfall of these businesses. Most businesses cannot sap the costs, both hidden and real that arise as a result of poor procurement and inventory concepts. It is therefore upon Grandiose Motors to put effective methods in place for the company to maximize profits and ultimately success. Unless appropriate mechanisms are put in place with regards to procurement and inventory management gains that are to be realized with respect to expansion will continue to be elusive. Appropriate mechanisms refer to those pointed above that if implemented will guarantee success at Grandiose Motors. Yours faithfully, Purchasing Manager, Grandiose Motors. References Aidis, R., & Welter, F. (2008) Innovation and entrepreneurship: successful start-ups and businesses in emerging economies, Edward Elgar Publishing, New York. Bettley, A., Mayle, D. & Tantoush, T. (2005) Operations management: a strategic approach SAGE, London. Bizmove.com (nd) Management Resources: Purchasing Management; The Function of Purhasing. [online] Available at: http://www.bizmove.com/general/m6i1.htm (9th May 2010). Brigham, E. F. & Houston, J. F. (2007) Fundamentals of financial management, Cengage Learning, New York. Budding, J (ed) (nd) Inventory Management. Pp 1-5 Drucker, P. F. (2007) Management challenges for the 21st century (2nd edition) Butterworth-Heinemann, London. Harding, M. & Harding, Lu. (2001) Purchasing (edition 2), Barron's Educational Series, London. Ho, K., M., S. (1999) Operations and quality management. Cengage Learning EMEA, New York. Kurtz, D.L. (2008) Contemporary marketing (13th edition), Cengage Learning, New York. Marsh, P. D. V. (2000). Contracting for engineering and construction projects (5th edition), Gower Publishing, Ltd., New York. Müller, M. (2003) Essentials of inventory management, AMACOM Division American Management Association, New York. Muller, M. (2006) ABC rule in inventory management. p 188 Murthy, P. (2007). Productions and operations management, New Age International, London. Palmatier, G. E. & Crum, C. (2003) Enterprise sales and operations planning: synchronizing demand, supply and resources for peak performance, J. Ross Publishing, New York. Parmenter, D. (2007) Pareto's 80/20 Rule for corporate accountants, John Wiley and Sons, New York. Pradhan, P. (2006) Retailing management 3E (2nd edition), Tata McGraw-Hill, New Delhi. Saxena, R., S. (2009) Inventory Management: Controlling in a Fluctuating Demand Environment. Global India Publications, New Delhi. Tyson, E. & Schell, J. (2008) Small business for dummies (3rd edition), For Dummies, New York. Wallin, C. M. J. Rungtusanatham and E. Rabinovich (2006) What is the “right” inventory management approach for a purchased item? International Journal of Operations & Production Management, 26 (1): 50 – 68. Read More